IMF says energy subsidized by $5.3 trillion worldwide

Published 8:55 PM ET Mon, 18 May 2015
Reuters

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Terry Tamminen for CNBC

Smog over Beijing, China.

Governments around the world charge prices for energy that do not account for its harmful environmental, health and other side effects, amounting to a $5.3 trillion "post-tax" subsidy this year, the International Monetary Fund said in a report on Monday.

The IMF said China in particular failed to charge its more than 1 billion consumers for the pollution that comes from heavy use of fossil fuels, adding up to a $2.3 trillion subsidy this year.

The United States was the second-biggest offender, with an estimated $699 billion subsidy, followed by Russia, the European Union, India and Japan.

The report comes as almost 200 nations are trying to work out a deal to combat global warming ahead of a summit in Paris in December. Getting rid of fossil fuel subsidies and setting policies to price carbon pollution are seen as key international measures that would help keep temperatures from rising.

The IMF has long urged governments to get rid of "pretax subsidies" that allow firms and households to buy coal, gasoline or other fuel sources below their cost of supply. Many governments, including Egypt, India, Indonesia and Jordan, have recently raised domestic prices to match those internationally, said the Washington-based institution charged with policing global economic and financial stability.

But the Fund said it had turned its focus to the post-tax subsidies that mean prices fail to reflect costs like unfair tax advantages and deaths from pollution.

In its last study on the subject in 2013, the IMF estimated these post-tax subsidies amounted to $2 trillion in 2011, or 2.9 percent of the world's gross domestic product.

With new data about the extent of environmental damage, the IMF says these subsidies totaled $4.9 trillion in 2013 and should rise to $5.3 trillion this year, or 6.5 percent of global GDP.

"The fiscal implications are mammoth: At $5.3 trillion, energy subsidies exceed the estimated public health spending for the entire globe," IMF economists Benedict Clements and Vitor Gaspar wrote in a blog post accompanying the report.

The IMF said about three-quarters of the damages from energy affect domestic consumers, meaning it is in countries' own interests to get rid of these subsidies.

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